The dual personality of federalism.

• Author: Tubbesing, Carl
• Position: Includes related articles on top ten proposals in Congress in 1998 to preempt state authority and devolution in 1990s

States may be the laboratories of democracy, but the federal government thinks that it knows best. It hardly ever does.

This has been a Dr. Jekyll and Mr. Hyde decade for state governments. The Dr. Jekyll side of the 1990s has gotten more publicity. This is the side of the decade's personality defined by devolution, flexibility and more responsibility for state legislatures. Dr. Jekyll has presented the states with landmark devolution legislation: most prominently, welfare reform, a new safe drinking water act, the children's health program and Medicaid reforms.

The Mr. Hyde aspect has received less attention. Preemption of state authority and centralization of policymaking in the national government characterize this half of the decade's dual personality. It restricts state options and promotes uniformity. The Mr. Hyde half has preempted state authority over telecommunications policy, federalized criminal penalties and given the federal government more responsibility for regulation of banks.

Dr. Jekyll is devolution. Mr. Hyde is counter devolution. Devolution trusts state officials and relies on them to be responsive and responsible. Counter devolution says state boundaries are archaic. Devolution subscribes to Justice Brandeis' premise that states are laboratories of democracy. Counter devolution raises the question, "Are states really necessary?"

The devolution trend may have lost momentum. (Only new legislation on work force training and surface transportation pending this year would continue devolution.) On the other hand, there are at least a dozen proposals before Congress this year that have the potential for more preemption and greater centralization in Washington of policymaking.

Is there something about the last decade of the 20th century that is accelerating the trend toward preemption? Yes and no. There are five primary explanations of why federal officials propose to preempt state activity. Two of these are more or less unique to the 1990s. Three, however, are permanent components of the preemption debate.

PREEMPTION BECAUSE OF TECHNOLOGY

There is no doubt that technological advances have altered the way the country conducts its business and the way people communicate. The Internet, computer networks, cellular phones and all of their technological and telecommunications cousins have shrunk the world. They ignore state boundaries, present daunting challenges to state regulatory schemes and tax structures, and tempt federal officials to supplant state regulation and taxation with national approaches.

Turn on your computer. Get on the Internet. Access the Barnes and Noble home page. Type in your Visa number. Order a hundred dollars worth of books. Do you pay your state and local sales tax? Probably not. Get in your car and drive to the mall. Go into Barnes and Noble and buy the same books. Do you pay your state and local sales tax? Absolutely.

Sign up with America Online. Pav the monthly fee. Do you pay a local government Internet access tax? Maybe, but probably not. Decide that you want to be the first in your neighborhood to use on-line telephony. Do you pay the telecommunications tax? Now, that's a really tricky one.

"Electronic commerce poses a long-term threat to the current tax system. The threat is that consumers will increasingly use electronic media for purchasing goods and services-circumventing conventional sales taxation," writes Thomas Bonnett in Is the New Global Economy Leaving StateLocal Tax Structures Behind? State legislators are only just beginning to grapple with the tremendously complex and politically charged questions of whether and how to tax transactions on the Internet.

Federal officials are concerned about how state and local governments will tax the Internet. Some, like California Congressman Christopher Cox, Oregon Senator Ron Wyden and the Clinton administration, worry that any rush by state and local governments to tax it will stifle a burgeoning new industry and dampen economic activity. Senator Wyden argues that taxation of Internet activities would prevent "small high-tech businesses from prospering."

Wyden and Cox are pushing federal legislation that would prevent state and local governments from enacting new Internet taxes for six years. They argue that a lengthy moratorium is necessary to give the industry a chance to grow and to provide time for government and industry officials to work out a systematic approach. North Dakota Senator Byron Dorgan, a former state tax commissioner, strongly opposes the Cox-Wyden bill. "Federal preemption is inappropriate," he says. "The federal government should keep its nose out of the states' business."

Technology, combined with a dramatically evolving economy, also explains federal attempts to preempt state regulation of the banking and insurance industries. State legislatures initiated the revolution in financial services industries in the 1980s when they began allowing interstate banking. In 1994, Congress approved the Riegle-Neal bank reform bill that largely substituted federal interstate branch banking rules for the ones states had developed. Legislation to modernize banking pending before this session of Congress would further erode state control of financial services. The bill, whose chief sponsor is House Banking Chairman Jim Leach, would limit states' regulatory authority over insurance and securities.

Iowa Congressman Leach argues that technology and the changing financial services marketplace make state regulation of the industry virtually obsolete. In a March 1997 speech before the Institute of International Bankers, the Banking Committee chair argued: "The global financial services industry is evolving at a rapid pace, and legislation is needed in part to reflect marketplace changes, in part to set the ground rules for the next generation of change."

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